Any real estate fund manager looking to diversify their tenant mix and satisfy investor demands for long term sustainable income streams would do well to look at the hotel sector lately.
More and more investment firms are either creating funds specifically targeting alternative property sectors (hotels, marinas, leisure, healthcare and student accommodation) or making their first forays into this market. Examples include UBS Asset Management’s Real Estate & Private Markets business setting up an open-ended UK long-lease vehicle to target alternatives – receiving an initial commitment of £90m from an unnamed UK local government pension plan earlier this year.
PwC figures show the first half of 2019 saw insurance and pension funds make up 20% of hotel investment in the UK – matching the market share of private equity. For context, this figure was only some 8% in 2015. Lenders too are increasingly keen to facilitate acquisitions. A report from risk advisory company JCRA shows that alternative property was the dominant asset class over the past year, with 57% of total transaction activity as investors moved towards more defensive assets. Industrial was the only other sector that saw a year-on-year rise in lending figures.
Despite the continued Brexit uncertainty, PwC found there were a greater level of hotel deals during 2018, with total deal volume reaching c. £6.6 billion, a 36% increase on the total deal volume in 2017. A modest slowdown is expected this year, however, decreasing to around £6 billion.
Much has been made of the office to residential permitted development rights of the last six years, but there are signs that hotel conversions could be the next wave to watch. They can also be accommodated from a wide range of use types. For instance, guests at the NoMad Hotel in London set to open next year will be unwinding in what used to be Bow Street Magistrates’ Court and Police Station.
There are also examples of large vacated departments stores – complete with their prime town centre locations – being snapped up by the likes of Premier Inn, while Hollis are providing cost management consultancy to IDOM who are transforming a former landmark office block at Neathouse Place, next to London Victoria into a 431 bed 4-star hotel.
With development sites in short supply and rising land costs, it’s no surprise to see hotel conversions becoming an ever-popular choice for investors and developers alike. In 2018, conversions represented a 34% share of the total new bedroom supply, an increase of ten percentage points compared to 2017 and approximately 5,200 new rooms, according to Knight Frank.
As a service
While the typically longer lease lengths are attractive, the appeal of hotels is also partly down to a shift in clients’ perception of property as a service. They have the flexibility to offer rooftop restaurants like Hotel Indigo who have included Marco Pierre White Steakhouse Bar & Grills within their recent developments in Cardiff and Glasgow among other cities or partner with start-ups such as Haus who turn hotel lounges into coworking spaces.
The versatility of hotels is perhaps best illustrated by The Ned – the former Midland Bank headquarters, which was fully restored and converted to hotel use in 2017 along with ten restaurants, spa, gym and events spaces.
Another change in attitudes of developers and investors is embracing the concept of social value, and the added benefit a hotel brings to the wider community; whether that be through employment opportunities for local people or accommodating increases in tourism and inward investment. Add to that the ever-growing importance placed on health and wellbeing and ‘wellness tourism’ – a market where global spend is expected to reach £711 billion in 2022, with 1.2 billion wellness trips taken annually – a hotel or portfolio catering to this demand in sought-after locations can very much become a prized asset.